Break-Even Point: Formula, Examples and a Simple Chart
The short answer
Your break-even point is the sales level where revenue exactly covers all costs, so profit is zero. Break-even units = fixed costs ÷ (price per unit − variable cost per unit). Break-even sales = fixed costs ÷ contribution margin ratio. A café with $12,000 of monthly fixed costs, a $5 average sale and $1.80 of variable cost per sale breaks even at 3,750 sales a month, or $18,750 in revenue.
Before you sign a lease, hire, or set a price, it helps to know one number: how much you have to sell just to cover your costs. That is the break-even point, and it takes about five minutes to calculate.
The formula
Split your costs into two kinds. Fixed costs stay the same whatever you sell: rent, salaried wages, insurance, software, loan payments. Variable costs rise with every sale: ingredients, packaging, card fees, shipping, commissions.
The difference between the price and the variable cost of one unit is the contribution margin: what each sale contributes toward fixed costs.
Break-even units = fixed costs ÷ contribution margin per unit
Break-even sales = fixed costs ÷ contribution margin ratio, where the ratio is contribution margin ÷ price.
A worked example: a small café
A café has $12,000 of fixed costs a month. The average sale is $5.00 and the variable cost of that sale, ingredients, cup and card fee, is $1.80.
- Contribution margin: $5.00 − $1.80 = $3.20 per sale
- Break-even units: $12,000 ÷ $3.20 = 3,750 sales a month, about 125 a day over 30 days
- Contribution margin ratio: $3.20 ÷ $5.00 = 64%
- Break-even sales: $12,000 ÷ 0.64 = $18,750 a month
The three levers
Only three things move break-even: the price, the variable cost per unit and the fixed costs. The receipt below shows how sensitive the café is to each.
WHAT MOVES BREAK-EVEN
Today: $12,000 ÷ ($5.00 − $1.80)3,750
Raise price to $5.503,243
Cut variable cost to $1.503,429
Rent rises $1,000 a month4,063
Price cut to $4.504,444
Drinks per month needed to break even.
Notice the asymmetry. A price cut of 50 cents raises the break-even by almost 700 drinks, because it comes straight out of the contribution margin. That is why discounting is so expensive for low-margin businesses. Our guide to profit margins explains the difference between margin and markup that trips up many pricing decisions.
Margin of safety
Once you know break-even, compare it with actual or expected sales. If the café sells 4,500 drinks a month, its margin of safety is (4,500 − 3,750) ÷ 4,500, about 17%: sales can fall that much before it starts losing money. Below 10% is fragile; a bad month or a new competitor can tip it into a loss.
Limits of break-even analysis
- It assumes one average price and cost. If you sell many products, use a weighted average contribution margin.
- Fixed costs are only fixed within a range. Past a certain volume you need another machine or person.
- Break-even is about profit, not cash. You can be above break-even and still run short of cash; see cash flow management.
Bottom line
Divide fixed costs by what each sale contributes and you have the number of sales needed to stop losing money. Know it before you sign a lease or change a price, and watch your margin of safety every month.
Common questions
What is the break-even point formula?
Break-even units = fixed costs ÷ (price per unit − variable cost per unit). Break-even revenue = fixed costs ÷ contribution margin ratio, where the ratio is (price − variable cost) ÷ price.
How can I lower my break-even point?
Raise prices, lower variable cost per unit, or cut fixed costs. Price changes usually have the biggest effect because they change the contribution margin on every sale.
What is the difference between break-even and payback period?
Break-even is the sales level where monthly profit is zero. Payback period is how long it takes for cumulative profit or cash to repay an upfront investment.
